Business Ratios (Introduction)

How does a business investor compare a small railroad line serving only a few states to a large railroad like Union Pacific?

Answer: Ratios!

Ratios are used in business to compare companies of different sizes within the same industry. The goal is to discover the best investment for return on your stock purchase. Business ratios essentially equalize different size companies within the same industry. A common mistake is to compare two different industries within the same sector (explained below).

Business ratios are strictly a function of the financial reports audited by Certified Public Accountants. There are five categories of financial ratios. Each category has no less than two different ratios. The sections below explain the five categories listed here:

1) Liquidity Ratios
2) Activity Ratios
3) Leverage Ratios
4) Performance Ratios
5) Valuation Ratios

A common mistake made by business investors is using ratios to compare different industries or

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Value investing is defined as a systematic process of buying high quality stock at an undervalued market price quantified by intrinsic value and justified via financial analysis; then selling the stock in a timely manner upon market price recovery.

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